I would have never imagined a ratings agency adding to hyper-inflationary pressured, but here we are.

Gold jumped $10, Silver jumped $0.70, S&P dropped 10 pts. The long end of the curve dropped over a point in price terms.

Good-bye RFR. Good-bye world reserve currency. Time to re-write all discounted cashflow models.

I have no idea what happends, when institutions with mandates to only hold government paper because they are AAA, are forced to sell it, simply because S&P says it’s only AA now.

This will give buyer-of-last-resort, bag-holder, TBTF-criminal-bank, Bernanke, the green light for QE3.

UPDATE: From the Q&A Session with the agency:

Which AAA-rated peers have a better fiscal position than the US?
UK, France, Germany and Canada, all of which are rated AAA, and have stable outlooks. UK had negative outlook in 2009, but since then S&P believes UK has implement a fiscal consolidation plan which the rating agency believes is credible. “The US has yet to agree on a plan.” Canada has the best fiscal position of the group.

Can you name which country’s fiat is in in the most trouble? I’ll give you a hint, it’s not Canada.

Real Gains

One can see that real-wealth appreciation is being generated, via the number of shares owned. Doesn’t matter what the fiat is worth, or where the multipliers are, my client owns about 8.8% more of the TSX than he did just 4 months ago, without counting deposits.

The only catalyst I see for period of deflation ahead, would be a contraction in multipliers starting anytime this year or next, kick-ed off by any possible combination of headline risk and psychology. This problem will of course, be finite, with a feed-back loop that could put North America back into a 2008-like job-shedding race. However, I don’t see it being permanent in the long run. I actually see the masses voting for completely socialist policies which would push the last job-creating innovation-driving capatalist, over the edge. It would be a litteral race to the bottom, and probably a top in the RATE of money printing, for probably a couple decades.

Energy will add to the feed-back loop problem.

The scenario I just conjectured is just one of many 5 to 10 year outlooks. The alternatives, are all just a question of how much devaluation, and how much growth, will we see. Both of these, bode well for commodities, stocks, and real-estate in the long run, like they have for the last century. If North America could switch to a cheaper energy source, before market forces, force their hand, this would become a competitive advantage. That’s happening in Ontario, right now. That has me very excited, to see the competitive advantage being grown, right in my back-yard.

Nobody has commodities on the offer.

Welcome to the Weimar Republic.

An old note, to remember, from Gonzalo Lira:

The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

Just for fun:

The debate between defaltion and hyperinflation, online, is heating up…again.

They can try, it won’t work.

Very scary fact:

The number of beneficiaries of Social Assistance, is up 25% Since October 2008. TWENTY-FIVE-PERCENT! 462,146 people in Ontario, recieved Social Assistance in January of 2011.

Are we helping more people, because, we can afford to? Or are we helping more people, because, more people can’t afford to help themselves?

We both know, there are a ton of reasons for real-estate to crash. Tons of reasons for fiat currencies in North America to crash. Tons of reasons for interest rates to sky-rocket, or stay low for a decade. Tons of reasons for commodities to explode [even] higher, or crash.

Question is, when?

If anybody out there, knows, please call me. I can leverage your bet 50:1 with finite risk. I’ll tell you how to do it. We’ll be both be billionaires, overnight. Oh…wait…

6% fees, in any market, is guaranteed to impede efficiency. So even if you did have an accurate crystal ball, or more information than other market participants, then there is the problem of estimating when the real-estate will actually reflect it. Oh, then add the unknown about government legislation to dampen (or accelerate) the problem.

Good luck.

My point is, it’s just as difficult, to game the real-estate market, as it is any other asset class. In the long run (decades), prices will likely be higher. (Outweighing the advantages or renting? Who knows, but you have to live somewhere) It’ll be a result of either government stimulus & fiat devaluation, or economic growth. One or the other.

Like a bunch of drunk college students, who’s buying the next round?

If it isn’t the Fed, and it isn’t Bill Gross…ummmm…who’s sticking around to pick up the tab when the party is over?

It represents another shift in my mentality and how I run money.  At this point, it’s very hard to stay leveraged short theta decay, since it leaves so much dollar denominated gamma risk on the table.

In the next 5 years, I’m convinced we will wake up one morning with the S&P 500 either down 25%, or up 250%.  Same for gold.  Same for oil.  For bond traders, it’ll be up 15%, or down 50%.  I have lots of reasons. I can make a case for all of these situations, and it’s not worth going bankrupt over.

So, I’m stepping away from the fiat.  I’m unloading loonies, and dollars like no tomorrow.  I’m late to take the plunge compared to some, but probably ahead of the trade compared to others. 5-10 years out, I’m positive this will have been smart.

I’m not paying off my mortgage, I’m locking in fixed rate loans, and I’m going to buy more real-estate with other people’s money (bankers) fiat denominated loans.  I’m buying volatility when there is statistically interesting times to do so.  I’m bidding on black swans with finite-risk, infinite upside base trades.  I’m not holding any discount or yield based instruments to store wealth for the purpose of capturing the discount.  I will hold long or short exposure in discount instruments, for the purpose of multiplier expansion or contraction based trades. I will be a seller of unlevered tail risk, when it makes sense to do so.

That said, if I could limit my trading, to vehicles only denominated in anything but a fiat currency, I would happily take on tail risk all day long.